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10/24/2012

Will the iPad Mini cannibalize iPad and iPad Touch sales?

Apple recently announced the iPad Mini which has had mixed reviews from analysts. The iPad Mini will have a 7.9-inch screen and will be priced at $329, compared to the regular 9.7-inch iPad that is priced at $499. It is expected to compete against prodcuts like Amazon's Kindle Fire and Google's Nexus 7, which are similar in size but priced from $159 to $199.

Steve Jobs was opposed to a smaller version of the iPad and it will be interesting to see how the product does. I don't expect the new product to create a shift in the overall demand of tablets, so which products is the iPad mini really competing against? If Apple is trying to compete against the lower end products like the Kindle Fire and Nexus 7, why would they price it $130 to $170 more than those products? I agree with analyst Michael Walkley who stated, "While we believe these strong sales will come largely at the expense of Apple's
competition, we concede iPad Mini will likely cannibalize iPad and iPod Touch
sales." If people can't afford the regular iPad at a price of $499, why would they pay $329 for the iPad Mini instead of getting the Kindle Fire for $159? I think that the new product will draw more potential buyers away from the regular iPad than the Kindle Fire or Nexus 7.

I think this post misses the big picture with Apple and the iPad Mini. Apple only makes a modest profit off of their hardware like the iPad and iPad Mini. I think the real genius behind the iPad Mini is getting more Apple Tablets into the hands of potential iTunes subscribers. You could debate that Apple makes about the same profit margin in the iPad Mini as the iPad. However, when Apple takes a 30% cut of every app sold off the app store, and 30% of every dollar spent in an app sold off the app store, you can see where the money is.

I think the iPad mini was an attempt by Apple to flood the market with even more Apple devices. Of course the iPad mini will cannibalize the iPad market a bit. In the long run though, Apple will sell more units and have more users browsing their digital store.

I can't speak to the profit margins on various Apple products, but this seems sensible to me. There are certainly a lot of successful business models besides Apple in which the stream of "subscriber" profits far outweighs the one time profit from the hardware purchase.